U.S. 10-Year Yield Close to 5-Week High Before Note Auction

Treasury 10-year note yields traded at almost the highest level in five weeks as the U.S. prepared to sell $24 billion of the securities, the second of three note and bond auctions this week totaling $72 billion.

Treasuries rose earlier amid concern Greece will need more support from European Union leaders after Standard & Poor’s cut the nation’s credit-rating outlook. Separate reports showed German exports and industrial production dropped, boosting demand for U.S. debt as a haven from Europe’s sovereign-debt crisis.

“The only thing driving the market is the 10-year auction,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of 21 primary dealers that trade directly with the Federal Reserve. “If the 10-year gets to 1.65 percent, it will draw some interest.”

The 10-year yield was little changed at 1.63 percent at 11:41 a.m. New York time, according to Bloomberg Bond Trader prices. The 1.75 percent note due in May 2022 fell 1/32, or 31 cents per $1,000 face amount, to 101 1/32. The yield increased to 1.64 percent yesterday, the highest level since July 2.

Treasuries have returned 2 percent this year as of yesterday, according to Bank of America Merrill Lynch indexes. The MSCI All-Country World Index (MXWD) of stocks handed investors a 9.7 percent gain in the period including reinvested dividends, according to data compiled by Bloomberg.

Fed Buys

The Fed bought $1.9 billion of Treasuries due from February 2036 to May 2042 today, with according to the Fed Bank of New York website.

The central bank received $5.901 billion in offers to sell bonds, or $3.03 for every dollar of debt it sold. The Fed’s Aug. 6 purchase of $4.646 billion of debt maturing from August 2020 to May 2022 attracted $2.51 in bids for each dollar of debt.

The purchases are part of Chairman Ben S. Bernanke’s plan to contain borrowing costs by swapping short-term Treasuries in the central bank’s holdings for longer maturities. The Fed is swapping shorter-term Treasuries in its holdings with longer- dated debt to put downward pressure on long-term borrowing costs.

“The more people wanting to sell bonds indicate that people think the market is a little toppy,” or at a high in price, said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York.

Note Sale

The 10-year notes scheduled for sale today yielded 1.67 percent in pre-auction trading, compared with the record low of 1.459 percent set at the previous auction on July 11.

Investors bid for 3.61 times the amount of debt offered last month, the second-highest level according to data compiled by Bloomberg that go back to 1993.

Direct bidders buying for their own accounts purchased a record 45.4 percent of the notes, based on data back to 2003. Indirect bidders, the investor group that includes foreign central banks, bought 40.6 percent of the debt.

Should weak demand drive the current 10-year note’s yield above the resistance point of 1.62 percent, the next level at which buy orders are thought to be clustered is 1.70 percent, Michael Cloherty, head of U.S. interest rate strategist at primary dealer Royal Bank of Canada’s RBC Capital Markets in New York, wrote in a note to clients today.

Europe’s Outlook

If the auction pushes yields below the 1.56 percent level, the next area where sell orders may be congregated is 1.48 percent, Cloherty wrote.

S&P lowered its outlook on Greece’s debt to negative from stable, which means it is more inclined to reduce its ranking for the nation. The government may fail to make the budget cuts required to receive its next aid payment from the European Union and the International Monetary Fund, the rating company said yesterday in a statement. Greece is ranked CCC by S&P, or eight levels below investment grade.

German exports, adjusted for work days and seasonal changes, dropped 1.5 percent in June from May, when they jumped 4.2 percent, the Federal Statistics Office said in Wiesbaden. Industrial production fell 0.9 percent from May, when it gained 1.7 percent, the Economy Ministry said in Berlin.

Treasuries briefly extended gains after the Bank of England reduced its growth forecast and said inflation will be below its target in two years as the euro-area crisis and the U.K. fiscal squeeze weigh on demand.

Economic Downgrade

The U.K. central bank sees annual gross-domestic-product growth of about 2 percent in two years, compared with a projection in May of 2.5 percent. It sees consumer-price growth at about 1.6 percent by then, below its 2 percent goal.

Treasury trading volume reported by ICAP Plc, the largest inter-dealer broker of U.S. government debt, averaged $197 billion in the two previous trading days this week, compared with an average of $253.2 billion last week. Trading has averaged $240.7 billion this year.

“Volumes are down,” said Guy Haselmann, an interest-rate strategist at primary dealer Bank of Nova Scotia in New York. “People are prepared to act, but only when they know what they’re really responding to. They just don’t want to get caught up in the illiquidity and noise of the summer marketplace.”

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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